Fed vs. Congress vs. Bankers

Posted Nov 15, 2015 by Martin Armstrong

QUESTION: Don’t you think it is wrong that the private banks own the institution that administers them.

ANSWER: You have to understand the original intent of the Federal Reserve. It was originally a bailout entity for banks, so the banks had to fund it. That made sense initially, but with time and circumstance, the Fed has morphed into something that is now a quasi-political-governmental agency. No one would have created what we now consider the Fed.

I do not think that the Treasury should own the Fed, because then politicians will control it for political purposes. I can hear it now: “Vote for me and I will give free interest on credit cards!” I do not think in its present form that it should be owned by banks who collect 6%. I would advocate a public float, as is the case in Switzerland.

My point is that the politicians keep changing the Fed, relieving themselves of ALL fiscal responsibility for economic booms and busts. The politicians blame the Fed, which is wrong since they are the primary cause of aggravating the business cycle.

I do not advocate conspiracy theories against the Fed or criticism of the Fed ignoring the role of Congress. To solve the problem, we MUST look at the whole. You need a central bank to clear. Bank failures were because of relationship banking where they borrow short-term and lend long-term. Elastic money made sense if you did not have enough to liquidate loans to repay depositors in a panic. The elastic money would expand during a panic and contract when over.

Now that banks are doing transactional banking and not holding long-term loans on their books, they no longer need elastic money or bailouts and should collapse when they screw up. The banks should be held for CRIMINAL prosecution if they are trading with other people’s money. You cannot have it both ways. If the Fed is to stimulate, then they should buy corporate paper, not government, and the money should be injected directly into the economy. Currently, the banks still refuse to lend money long-term.

The Fed is caught between politicians and bankers. That is not a very nice place to be these days. We will have to REFORM this position after the crash, but eliminating the Fed will create chaos and will not solve the problem as long as Congress has the power to create debt.